U.S. Corporate Credit Swaps Little Changed as Spain Growth Falls

A gauge of U.S corporate credit was little changed as European stocks fell the most in two months on concern that the sovereign-debt crisis is worsening.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, held at a mid-price of 102.6 basis points at 4:06 p.m. in New York, according to prices compiled by Bloomberg. The index rose as high as 105.5 basis points in morning trading.

Spain’s central bank said gross domestic product continued dropping at a “significant pace” this quarter, causing concern that the financial crisis will infect corporate balance sheets and impair companies’ ability to repay obligations. The Stoxx Europe 600 Index (SXXP) declined 1.8 percent and the yield on Spain’s 10-year bonds surged as high as 6.07 percent.

“People expected Europe not to be a problem, that the central banks would protect us, but I’d say they are very complacent,” Stephen Antczak, Citigroup Inc. (C)’s New York-based head of U.S. credit strategy, said in a telephone interview. “There’s still a fair amount of risk out there from earnings to the fiscal cliff to Europe and that affects the credit markets as a whole.”

RadioShack Swaps

The credit swaps index typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Credit swaps tied to RadioShack Corp. (RSH) rose 1.6 percentage points to 36.6 percent upfront as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $3.66 million initially and $500,000 annually to protect $10 million of RadioShack’s debt for five years.

RadioShack said today that Chief Executive Officer James Gooch stepped down and was replaced on an interim basis by its finance chief. The Fort Worth, Texas-based company’s shares have plummeted 73 percent this year amid weak consumer spending and heightened competition.

Risk Premium

The risk premium on the Markit CDX North America High Yield Index rose 5.6 basis points to 502.6 basis points, the highest since Sept. 10, Bloomberg prices show. The measure of speculative-grade companies’ default risk will begin the switch to a new series tomorrow, replacing firms that no longer have appropriate credit grades or that aren’t among the most actively traded borrowers.

Series 19 of the high-yield index will incorporate credit swaps tied to CIT Group Inc. (CIT), Calpine Corp. (CPN) and a unit of Charter Communications Inc. that aren’t among the active contracts reported by the Depository Trust & Clearing Corp. The Federal Reserve’s decision to hold interest rates near zero through 2015 has sapped demand for insurance against companies missing debt payments and pushed bond yields to record lows.

“I think you’re going to start seeing people stretch for yield,” Matthew Meyer, vice president and senior portfolio manager for high-grade fixed income at Loews Corp., said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “There’s no question it’s tough to not look around” at riskier assets.

Outgoing Companies

Markit will remove the contracts of Ford Motor Co. (F), Residential Capital LLC and Pioneer Natural Resources Co. (PXD) from the index. Ford and Pioneer were raised to investment grade and Residential Capital, the mortgage-lending unit of Ally Financial Inc. (ALLY), filed for Chapter 11 bankruptcy on May 14. The list of companies that will comprise the index is provisional until the publication of a finalized annex, Markit said.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, added 2.17 basis points to 16 basis points. The measure rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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